A combination of consumer price inflation settling within the South African Reserve Bank’s expectations and the rand rallying to a three-year high has raised expectations of multiple interest rate cuts this year.
Speaking to journalists in Davos on the sidelines of this week’s World Economic Forum, Bank governor Lesetja Kganyago said the country was in “a very good space” as a result of its revised inflation target of 3% and ongoing fiscal consolidation and structural reforms.
“We are expecting growth of around 1.4% for this year, still modest, but at the very least it’s double the growth of the previous year,” he said. “When you go through the kind of reforms that we have had to go through, you would expect growth to be pretty modest.”
The Bank’s monetary policy committee (MPC) will meet this week to determine the first repo rate announcement for the year. This comes after Stats SA announced that inflation for December ticked up to 3.6%, pinning the average CPI for 2025 at 3.2%, the lowest since 2004.
We are expecting growth of around 1.4% for this year, still modest, but at the very least it’s double the growth of the previous year
— Lesetja Kganyago, Reserve Bank governor
Ahead of the release of the Stats SA CPI print this past week, Kganyago correctly predicted that CPI for December would tick up to 3.6%. Inflation would average around 3.5% and converge to the new 3% target in 2027.
“We have a new anchor of 3%, with a tolerance band of 1% on either side,” Kganyago said. “We have come from an economy where we had a very wide and high inflation target range, with high inflation outcomes.
“Since 2017, we have been on a trajectory that is lowering inflation expectations. And the most recent reading of inflation expectations shows they are actually converging towards our new inflation target.”
Busisiwe Mavuso, CEO of Business Leadership South Africa (BLSA), told Business Times that the rand’s rally reinforced the recent disinflation trend and gave the Bank more room to begin a cautious cutting cycle. However, the pace of easing was still likely to be gradual rather than aggressive.
“For South African businesses, a stronger rand and softer CPI outlook translate into lower imported input costs and a progressively more supportive interest-rate environment, improving planning visibility for capex and working-capital financing,” Mavuso said.
Not ‘mission accomplished’
She said the latest inflation reading, while a touch higher than the prior month’s, nonetheless confirmed that price pressures were running comfortably within the target band and had surprised on the downside.
“This supports the story that cyclical forces — a firmer rand and softer oil — are providing meaningful relief, but the underlying picture is not yet a simple ‘mission accomplished’. Food inflation is being held down by unusually soft seasonal items, while meat and several core components remain sticky and could refirm as temporary offsets fade.”
BLSA believes the case for a modest rate cut has strengthened, even if the MPC remains cautious. It said that for businesses the key takeaway is that borrowing conditions are likely to become gradually more supportive, but businesses should still plan around a high real-rate environment.
The eventual better inflation outcome will be driven primarily by factors such as the firmer rand, lower inflationary expectations, reform efficiency gains and modest domestic demand. Barring shocks, there should therefore be further good news for business and consumers on the inflation and interest rate fronts as 2026 unfolds.
— Prof Raymond Parsons, North-West University Business School
Prof Raymond Parsons of North-West University Business School said the December uptick in the CPI confirmed the general expectation that there would be a mild upward trend in the CPI in the months ahead, before easing again later towards the new 3% inflation target.
“The eventual better inflation outcome will be driven primarily by factors such as the firmer rand, lower inflationary expectations, reform efficiency gains and modest domestic demand. Barring shocks, there should therefore be further good news for business and consumers on the inflation and interest rate fronts as 2026 unfolds.”
Parsons said the economy was set to benefit from “probably at least two” cuts of 25 basis points (bps) each during the course of the year. The MPC would, as always, be data-driven in its decision-making, he added.
“But if the MPC is confident about its inflation forecasts, it may well make the first cut next week. If not, it will do so later in the year. In any event, the firm prospect of further lower borrowing costs this year will be valuable support for an economy still in a weak recovery phase.”
Parsons said the Bank was correct to take a fresh look at the long-standing prime rate arrangement, which has prevailed for 25 years and which, like the previous inflation target range, was due for review despite its original advantages.
Frank Blackmore, lead economist at KPMG South Africa, said the main contributors to the December CPI print were housing and utilities, which added a third, or 1.2 percentage points. Most notably, he said, it was obvious that both the electricity price increase at 7.9% and water at 7% contributed most to the increase.
“Our view for inflation for next year will be slightly higher than this rate, and the reason is not that we see month-on-month changes increasing that much, but because of the base effects in calculating the inflationary numbers.
“We therefore expect inflation to come in around 3.7% in 2026. This will not deter the Bank from reducing interest rates further throughout 2026 because the expectations for inflation are converging on the new target of 3% and, in our prediction, we can therefore expect an additional 50 basis points of cuts through 2026,” said Blackmore.
Adriaan Pask, CIO at PSG Wealth, said inflation remained subdued across most categories, with rental inflation still relatively low despite a modest uptick driven by base effects and consumer goods inflation also remaining very low.
He said the Bank was likely to be in a position to cut interest rates in the first few months of 2026.
“Policymakers will be encouraged by the decline in inflation expectations in the final quarter of 2025 and are likely to revise their own forecasts lower at next week’s MPC meeting.”
Pask said he expected two 25bps rate cuts in the coming months, although the Bank could adopt a cautious approach and delay the first cut until March.
For Hayley Parry, money coach and facilitator at 1Life’s Truth About Money, one of the standout features of the CPI print was that the projected inflation rate of 3.2% for 2025 was the lowest in 21 years, down from 4.4% in 2024 and 6% in 2023.
“One might be looking at these figures and be thinking, ‘How is this related to my budget because it doesn’t feel like an average of 3% of inflation for me and my personal budget?’ I think where things really get interesting is when we look at the different spending categories and how each has been affected by inflation over the past year, namely fuel, food and fees.”
Tando Ngibe, senior manager at Budget Insurance, said prices in South Africa were still rising but at a relatively slow and manageable pace, with inflation being slightly higher than in the previous month but still well within the Bank’s comfort zone.
She said interest rates were unlikely to drop sharply in the short term, but they were also under pressure to rise, so borrowing costs should therefore remain relatively stable for now.
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